We are again in an inflationary period and, consequently, the amount of nonsense that I hear uttered by politicians or “official” economists is beyond comprehension.
Two things, however, emerge from this fabric of nonsense uttered by the men of Davos, anointed of the Lord and other inspectors of finances.
- It was not predictable.
- It’s not their fault.
And these are two blatant lies.
To prove that these men are at best incompetent, at worst sold out, and one does not exclude the other, I will take the history of inflation in the United States over the last hundred years, to show first of all that this rise in inflation was perfectly foreseeable and then that it is them who triggered it voluntarily since any rise in inflation facilitates the increase in the weight of the State in the economy, and therefore increases their power.
Let’s start by trying to measure the phenomenon by constructing a price index base 100 on 1/1/1920 which would be made up half of the price of wheat (=food, necessary for human survival) and half of energy (=economy, necessary for trade between humans) and which remains constantly at 50/50.
Explanations. From 1920 to 1971, prices remained relatively stable. The disaster begins with the abandonment of the gold standard by Nixon in 1971, which gave freedom to central bankers and politicians to do anything, and they did not deprive themselves of it.
The dollar has since lost 97% of its purchasing power against the IDL Wheat/Energy Index in fifty-two years. Hard to do worse. Removing central banks and prohibiting budget deficits seem to me to be two measures to be taken as soon as possible in every democracy since the debt is a disguised way of circumventing the tax vote by the People.
Let us now come to a more serious measure of the rise in prices and seek the cause of the loss of value of the currency since 1920.
This is what I do in the second graph.
The red line is the IDL price index defined above.
The retail price index in the USA is represented by the blue line, where we see that the dollar has not lost 97% of its value but only 93.5% (phew, I feel better).
Overall, the IDL index, whose composition everyone understands, and the official index rose together, fell together, and performed similarly over the long term. But my own index cannot be tweaked by central bank statisticians to make an inflation that would be very real disappear. As Churchill said, I only trust statistics that I have faked myself.
A note: when the red line crosses above the blue line, it means that the poorest among us see their standard of living fall the most, since a greater part of their expenditure as a percentage of their income is devoted to food and energy. Inflation is actually a tax on the poor, levied for the benefit of the rich and this is totally unacceptable.
Let’s come to the essential question: what triggered these price increases in the past?
Answer : still weak monetary policy. It is therefore each time a voluntary and conscious decision to fuck up the currency.
Explanations: We have had three major inflationary surges over the past century.
- 1937-1950: prices double on the official index and quadruple on the IDL Index
- 1971-1982: prices double on the official index and quadruple on the IDL index
- 2004 – …..? : official prices have already doubled, the IDL index more than quadrupled, but it’s not over, the worst is ahead of ussince monetary policy rest inflationary, with real rates still being negative.
Because, in all three cases, we had negative real rates at the start of the phenomenon , that is to say that the political or banking authorities did not want to pay the market price to borrow, in order to be able to spend more, in the hope of getting re-elected. Simply put, they manipulated the price of time (interest rates) so they could borrow more and spend more, nowby taxing small savers for the benefit of crony capitalism, which will be able to reward them when everyone retires.
Let us recall the definition that Rueff gave of inflation : Subsidizing worthless expenses with money that doesn’t exist.
Subsidizing state spending means not paying the real price for borrowing, which always leads first to a sharp increase in the money supply and then to an acceleration in the rise in prices, which penalizes the poorest. This is what has stillled to inflation and which corresponds very exactly to all the periods hatched in green
- From 1937 to 1950, it was necessary to finance the Second World War. That is.
- From 1971 to 1982, it was necessary to finance the War in Vietnam and the new social programs created during the Johnson Presidency. The result was a military defeat and a deep decline in the standard of living of the poorest.
- Since 2004, state spending has exploded in the USA to finance endless and useless wars, Iraq, Syria, Libya, Afghanistan etc., an energy transition that will fail, unimaginable social transfers and who knows what else.
The result will be, as always when it comes to unjust wars and foolish spending, a series of military defeats and a further deep decline in the standard of living of the poorest in the United States.
It can not be otherwise.
Finally, let’s come to the last question: how can the reader of the IDL protect himself against this impoverishment which threatens him since our politicians follow the same policy? I have already often spoken of Chinese bonds, of the 10 stocks which have nothing to do with either the French state or the American state, and gold.
I also explained how to build a portfolio where 50% of the positions would be established in anti-fragile stocks (gold and Chinese bonds).
I’m going to make a small point about another investment that the reader might consider more speculative than part of the stable portfolio, I want to talk about the other precious metal, the metal silver, which seems very undervalued.
Here is the graph.
Apparently, if I do a small regression between the price of gold and the IDL index of the cost of living in the USA, the metal silver should see its price rise by around 70% to catch up with the theoretical level where it should be (R2=.83). I never encountered a regression that indicated a 70% undervaluation that I did not like, but the results were not always in line with my expectations and therefore I am a little suspicious. When something is too obvious, I tend to be suspicious.
But an investment in silver metal, even if it is a bit too obvious, still seems more clever to me than a position in French or German bonds.
I open a speculative position on silver metal.